INSIDE THIS ISSUE
• 1Q2012 Antitrust Developments
• Scott+Scott Settles Schering-Plough Shareholder Case
• Federal Enforcement Agencies Investigate The Mortgage Loan Securitization Industry
• Dodd-Frank Whistleblower Provisions & Advent Of The Professional Whistleblower
• Conferences And Educational Seminars
The first quarter of
2012 saw an active Department of Justice (DOJ) in the area of criminal
enforcement. The DOJ collected $548
million in fines from auto part suppliers, won guilty verdicts in an antitrust
jury trial, and, for the first time, publicly acknowledged its expansive probe
of the money center banks that participated in setting interest rate
benchmarks. Two U.S. Court of Appeals decisions strengthened the ability of
plaintiffs to privately enforce the antitrust laws. The U.S. Court of Appeals
for the Sixth Circuit held that plaintiffs may draw factual allegations of
antitrust violations from foreign enforcement agency investigations, in this
case the European Commission (EC). The U.S. Court of Appeals for the Second
Circuit refused to enforce class action waivers found in arbitration agreements
when the waivers would effectively leave the plaintiffs without a mechanism to
assert antitrust claims.
Fines Mount In DOJ Auto Parts Cartel Investigation
On January 30, 2012,
the DOJ announced a second round of criminal charges in its global auto parts
cartel investigation. Japanese auto part
suppliers Yazaki Corp. and Denso Corp. pled guilty to criminal price-fixing
charges and agreed to pay $548 million in fines. Under the plea deal, Yazaki will pay $470
million and four of its executives will serve prison terms. Denso will pay $78 million in fines. According to the DOJ, the $470 million fine
paid by Yazaki is the second-largest ever fine for a price-fixing
violation. In November 2011, the DOJ
announced that Furukawa Electric Co., Ltd. pled guilty to price-fixing charges
and agreed to pay a $200 million penalty, bringing the total fines in the probe
to $748 million.
AU Optronics And Executives Found Guilty Of Price Fixing
On March 13, 2012,
following a two-month trial, a federal jury in San Francisco, California,
convicted AU Optronics Corp. and two of its executives of conspiring with other
electronics makers to fix prices on thin film transistor liquid crystal display
panels (LCD panels), commonly used in computer monitors and televisions. The jury convicted AU Optronic’s former
president and its current vice president.
The convicted executives face up to 10 years in prison and penalties of
up to $1 million. AU Optronics faces a
fine of up to $1 billion. The jury found
that AU Optronics met with its competitors and fixed prices during a series of
meetings between 2001 and 2006. The jury
concluded the LCD panel makers gained more than $500 million from their
price-fixing conspiracy. The overcharge
amounts to $53 per panel. “The jury
finding $500 million in ill-gotten gains by members of the cartel demonstrates
the harmful effect of this price-fixing conspiracy on American businesses and
consumers,” said Acting Assistant Attorney General Sharis A. Pozen. “The jury’s decision to hold not only the
companies but also their top executives accountable for their anticompetitive
actions should send a strong deterrent message to board rooms around the
world.”
Other LCD makers pled
guilty prior to trial; they include LG Display Co., Ltd., Chunghwa Picture
Tubes Ltd., Chi Mei Optoelectronics Corp., and Sharp Corp. Under the plea deals, these companies agreed
to pay more than $860 million in fines in aggregate.
DOJ Acknowledges
Criminal Investigation Of Manipulation Of Benchmark Interest Rates
In a letter made
public on March 6, 2012, the DOJ acknowledged its criminal investigation into
collusive manipulation of benchmark interest rates, including the London
Interbank Offered Rate (Libor), Tokyo Interbank Offered Rate (Tibor), and Euro
Interbank Offered Rate (Euribor). The
DOJ submitted the letter to the Honorable Naomi Reice Buchwald, U.S. District
Court for the District of Southern New York, who is presiding over a
multidistrict litigation involving class action lawsuits against the banks that
participated in the setting of Libor, Tibor, and Euribor. Those banks include Credit Suisse Group AG,
Bank of America Corp., Barclays PLC, Royal Bank of Scotland Group PLC,
Citigroup Inc., Deutsche Bank AG, and UBS AG, among others.
Sixth Circuit Revives Copper Tubing Cartel Case
On March 2, 2012, the
Sixth Circuit reversed the dismissal of an antitrust action brought by Carrier
Corp., the largest manufacturer of air conditioning and commercial
refrigeration equipment, against copper tube manufacturers Outokumpu Oyj and
Mueller Industries, Inc. Carrier’s lawsuit stemmed, in part, from two
investigations conducted by the EC in 2003 and 2004. The EC found that several copper tube
manufacturers fixed prices and allocated customers in the markets for plumbing
and industrial copper tubing. The EC’s
findings were limited to Europe and did not make any findings about the U.S.
market. Carrier alleged that the
conspiracies extended to the U.S. market.
Specifically, Carrier alleged that the conspirators allocated Carrier’s
U.S. business to Outokumpu and its European business to Wieland Werke AG
(Wieland) and KM Europa Metal AG (KME).
Carrier’s complaint stated that shortly after the EC investigation was
made public, Wieland and KME began competing with Outokumpu for Carrier’s U.S.
business.
The district court
held that Carrier’s allegations were “wholly unsubstantiated and frivolous”
because the complaint drew allegations from the EC decisions and did not
sufficiently allege an effect on U.S. markets.
The Sixth Circuit reversed, finding the district court erred in failing
to consider the EC-based allegations.
The court explained that the EC’s silence as to the U.S. markets “may
simply reflect the limited scope of the decision.” By disregarding allegations based on the EC’s
findings, the district court had deprived Carrier of the presumption of the
truth of its allegations. The court also found persuasive Carrier’s allegation
that Wieland and KME entered the U.S. market shortly after the EC uncovered the
conspiracy: “When two companies refrain from entering a market and then
suddenly do so after a cartel dissolves, however, there are good grounds for
suspicion.” Accordingly, Carrier’s
allegations were sufficient to state a claim and the case was remanded for
further proceedings in the district court.
Merchants Defeat Class Action Waivers In The Second
Circuit
On January 31, 2012,
the Second Circuit ruled that American Express Co. cannot enforce arbitration
agreements containing class action waivers against merchants pursuing antitrust
tying claims against the company. This
decision is significant because it follows the U.S. Supreme Court’s recent
rulings in AT&T Mobility LLC v.
Concepcion, No. 09-893 (2011), and Stolt-Nielsen
S.A. v. AnimalFeeds International Corp., No. 1198 (2010), in which the
Court enforced class action waivers found in arbitration agreements.
The Second Circuit
held that enforcement of the class action waivers would preclude the merchants’
ability to bring antitrust claims because individually arbitrating the claims
would be cost-prohibitive, effectively depriving the merchants of the
protection of the antitrust laws. The
merchants submitted expert testimony that the average loss suffered by an
individual merchant was $1,751, and the cost of an economist, which would be
necessary to proving the claims, would be between $300,000 and $2 million. Thus, no individual merchant could be
expected to assert a claim because to do so is not cost-effective. When merchants band together in a class
action, however, the cost of the economist is shared among the many class
members.
This was the third
time the Second Circuit has held American Express’ class action waivers
unenforceable against the merchants. The
court concluded, “Eradicating the private enforcement component from our
antitrust law scheme cannot be what Congress intended when it included strong
private enforcement mechanisms and incentives in the antitrust statutes.”
Scott+Scott
Settles Schering-Plough Shareholder Case
On February 28, 2012,
the Honorable Dennis Cavanaugh, U.S. District Court for the District of New
Jersey, entered an order granting final approval of the proposed settlement in Plymouth County Contributory Retirement
Systems v. Hassan, No. 08-1022 (“Plymouth”).
Plymouth was a shareholder derivative case brought on behalf of the
Schering-Plough Corporation (“Schering”), a major U.S. pharmaceutical company
based in New Jersey and now known as Merck & Co., Inc. as the result of a
merger. The complaint alleged that
numerous officers and directors of Schering concealed the results of the
Enhance drug trial in order to conceal the fact that Schering’s marquee drug,
Vytorin, was no more effective at reducing the risk of heart attacks than
competing generics.
These actions by
Schering’s officers and directors caused the company significant harm,
including a 41% drop in share price when the truth was revealed, a loss in
market capitalization, a rash of investigations by state attorneys general,
U.S. Department of Justice and U.S. Food and Drug Administration
investigations, class action lawsuits by patients or payors seeking reimbursement
for payments for an ineffective product, securities class actions by investors,
ERISA class actions by employees, insider trades of approximately $40 million,
and the expenditure of hundreds of millions of dollars in fines and attorneys’
fees.
The action sought to
hold Schering’s disloyal officers and directors accountable for this harm, and
to ensure that such wrongdoing would not occur in the future. Scott+Scott, as counsel for the plaintiff,
aggressively prosecuted this action by, among other things, reviewing 7,000,000
pages of documents that were produced in the action and by participating in
over 40 depositions of fact witnesses.
These efforts were successful in bringing about a settlement with the
defendants and the company whereby the company would institute major corporate
governance reforms designed to prevent the mishandling of drug trial results in
the future. A well-respected expert in
corporate governance at the Fordham University School of Law, Sean Griffith,
valued the reforms achieved at $50-$75 million.
Scott+Scott is proud
to have achieved this significant victory for the shareholders of Schering.
Federal Enforcement Agencies Investigate The Mortgage Loan
Securitization Industry
In his January State
of the Union address, President Obama announced the creation of a special unit
of federal prosecutors and leading state attorneys general to expand
investigations into the abusive lending and packaging of risky mortgages that
led to the housing crisis. Since then,
announcements have been made that the Department of Justice (“DOJ”) and
Securities Exchange Commission (“SEC”) have issued subpoenas to some of the
largest banks in the country seeking documentation and other information
related to the origination, underwriting, and securitization of mortgage loans.
When banks issue
mortgage loans to home owners, it is common for these mortgage loans to then be
sold to other institutions. These
institutions often aggregate the mortgage loans into pools and create
securities out of the large accumulations of loans. These securities are referred to as
“mortgage-backed securities,” which are essentially investments in a portfolio
of home mortgages. Mortgage-backed
securities are sometimes referred to as “pass-through” securities because
homeowners’ mortgage principal and interest payments are “passed through” to
investors. The market for these
instruments greatly expanded in the years leading up to the financial crisis of
2008, but has since plummeted and become the subject of dozens of
lawsuits.
Five of the largest
originators of mortgage loans during this era, JPMorgan Chase, Wells Fargo,
Bank of America, Citigroup, and Ally Financial, have all disclosed in their
annual reports filed with the SEC that they are being targeted in the
mortgage-backed securities investigations.
Ally Financial reported that the SEC served subpoenas “seeking
information about various aspects of the process surrounding securitizations of
residential mortgages with which certain mortgage subsidiaries were involved as
sponsor or servicer.” Wells Fargo
disclosed it “has received a Wells Notice from SEC staff relating to Wells Fargo’s
disclosures in mortgage-backed securities offering documents.”
This new
investigation picks up where Congress left off.
The Permanent Subcommittee on Investigations of the United States Senate
investigated the cause of the financial crisis by holding hearings, subpoenaing
documents, and conducting interviews.
The committee issued a report in April 2011, concluding that the search
for increased growth and profit by banks led to the origination and securitization
of hundreds of billions of dollars in high risk, poor quality mortgages that
ultimately plummeted in value, hurting investors and, ultimately, the U.S.
financial system.
Although the SEC and
DOJ are just beginning their investigations into the mortgage-backed securities
industry, Scott+Scott has been on the forefront of this issue. Scott+Scott has extensive experience
uncovering issues and prosecuting cases involving the sale of mortgage-backed
securities, actively pursuing numerous cases on behalf of institutional
investors who lost money by investing in these instruments. Although government investigations help to
deter this conduct going forward, the true victims are unlikely to be
compensated unless private actions are maintained.
Dodd-Frank Whistleblower Provisions &
Advent Of The Professional Whistleblower
As the name implies,
“whistleblower” is a term for an individual who informs authorities or brings
attention to allegedly illegal or improper activities that might otherwise
escape regulatory scrutiny.
Laws governing
whistle blowing and whistleblowers are relatively new and have evolved in large
part due to financial scandals. The most
recent iteration of these laws can be found in the Dodd-Frank Wall Street
Reform and Consumer Protection Act (“Dodd-Frank”). Dodd-Frank is a federal statute signed into
law by President Obama on July 21, 2010, in the wake of the 2007-2010 financial
crises. It was enacted as a way to curb
illegal activities in various financial markets in the
A cornerstone of
Dodd-Frank is Section 922, which expanded the rules and protections extended to
whistleblowers. Specifically, Section
922 established a new and dedicated whistleblower program within the Securities
and Exchange Commission (“SEC”). Section
922’s whistleblower provisions are designed to protect whistleblowers when they
step forward and to incentivize whistle blowing through the use of monetary
awards.
Under Section 922, a
whistleblower who voluntarily provides the SEC with original information about
a violation of the securities laws leading to a successful SEC enforcement
action is entitled to a percentage of the monetary sanction levied in the case. The reward is anywhere between 10%-30% of
monetary sanctions that exceed $1 million.
An interesting and
oft-debated aspect of Section 922 is the fact that, as written, Section 922
specifies that a whistleblower can be any
individual who provides the SEC with information regarding a violation of
securities laws. In other words, the
provision is not limited to an employee or officer of the company in
question. Any person with verifiable
original information about a company’s violation of the securities laws stands
to profit from blowing the whistle. For
some whistleblowers, this could result in making a significant sum of money.
Consequently, many
law firms have started to advertise services to whistleblowers. Financial blogs
and information sharing portals are now replete with so-called “professional
whistleblowers.”
While the advent of
the professional whistleblower may or may not have been an intended consequence
of Dodd-Frank, it is undeniable that whistle blowing is effective. According to the Association of Certified
Fraud Examiners’ 2010 Report to the
Nations on Occupational Fraud and Abuse, 40% of fraud cases involving
public companies were detected by tips.
And the SEC will not ignore valid tips simply because the informing
party is not a company insider or employee.
Instead, the SEC has recently commented that it wants to encourage
people to come forward who can “connect the dots in ways that they hadn’t been
connected before and in ways that our own Enforcement people hadn’t done.” Indeed, it has been recently noted that
Dodd-Frank’s allowance for professional whistle-blowers allows the SEC to take
advantage of the analytical analysis and intellectual abilities of academics
and people who think outside the box.
As such, Dodd-Frank
and the SEC’s apparent embrace of the advent of the professional whistleblower
means that securities fraud tips, accusations, and investigations will likely
rise in the coming years. What remains
to be seen, however, is whether Dodd-Frank and professional whistleblowers will
increase securities fraud convictions and securities fraud recoveries.
Conferences And Educational Seminars
+April 12-13,
2012
New
England States GFOA (NESGFOA) 20th Annual Seminar
The
Conference Center at Waltham Woods
Waltham,
MA
NESGFOA promotes and
encourages a closer relationship among those engaged in finance in the
municipal, state, and federal service.
The conference provides discussion, analysis, and solutions under the
laws existing in the New England states to public officials whose
responsibilities and duties involve addressing state and municipal problems. The conference also offers educational programs
and training especially important to public finance officials and employees
during pension reform.
+April 29-May
2, 2012
Building and Construction Trades Department
AFL-CIO (BCTD) Legislative Conference
Washington
Hilton and Towers Hotel
Washington, DC
The conference offers the building trades unions to unite in one
location to share information regarding many aspects of union business: union
organizing, contract negotiations, fiduciary responsibilities, Taft-Hartley
fund issues, and media matters, as well as legislation. This is one of the largest and most
comprehensive union conferences where participants include new union members
and international presidents of unions in several of the building trades.
Government Finance Officers Association Conferences
+April 3-5, 2012
New
York State GFOA
Albany Marriott Hotel
Albany, NY
+April 18-20, 2012
California
Municipal Treasurers Association (CMTA)
Hyatt Regency Sacramento
Sacramento, CA
+April 18-20,
2012
Iowa MFOA
Holiday Inn
Airport
Des Moines, IA
+April 18-20, 2012
Utah
GFOA
Lexington Hotel
St. George, UT
+April 20, 2012
Maryland
GFOA
BWI Marriott
Linthicum, MD
+April 24, 2012
Oregon
State Fiscal Association (OSFA)
Salem Conference Center
Salem, OR
+April 26, 2012
Connecticut
GFOA
Anthony’s Ocean View
New Haven, CT
+April 29-May 2, 2012
Pennsylvania
GFOA
Penn Stater Hotel and Conference Center
State College, PA
Thomas Jefferson, born April 13, 1743, and author of the
Declaration of Independance:
“We hold these truths
to be self-evident, that all men are created equal, that they are endowed by
their Creator with certain unalienable Rights, that among these are Life,
Liberty and the pursuit of Happiness.”
-- The unanimous declaration of the thirteen United States
of America, July 4, 1776.
Scott + Scott LLP is a nationally recognized law firm headquartered in Connecticut with offices in New York City, Ohio and California. The firm represents individual as well as institutional investors who have suffered from corporate stock fraud. Scott+Scott has participated in recovering billions of dollars and achieved precedent-setting reforms in corporate governance on behalf of its clients. In addition to being involved in complex shareholder securities and corporate governance actions, Scott+Scott also has a significant national practice in antitrust, ERISA, consumer, civil rights and human rights litigation. Through its efforts, Scott+Scott promotes corporate social responsibility.
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